Sunday, November 30, 2014

One Friday afternoon a dozen years
ago, Larry Page, one of the founders of Google, posted on the wall of
the office kitchen a printed-out screenshot of Google ad results, with
“These Ads Suck!” scrawled on it. Google’s AdWords engine was supposed
to serve up ads that were relevant to your search terms. He was finding
that if you searched for Kawasaki H1B, the vintage motorcycle, you’d get
ads for lawyers who would help you with your H-1B visa. That sort of
thing. By Monday morning, five engineers who weren’t even on the
advertising team had, acting on their own, devised a software solution
to the problem—a solution that proved to be worth billions of dollars.
“It wasn’t Google’s culture that turned those five engineers into
problem-solving ninjas who changed the course of the company over the
weekend,” Eric Schmidt and Jonathan Rosenberg—the company’s former
C.E.O. and its former head of product development, respectively—write in
“How Google Works” (Grand Central). “Rather it was the culture that
attracted the ninjas to the company in the first place.”

What’s
Google’s secret? This is an irresistible question, because Google is
the most successful new business corporation of the twenty-first
century. Still only fifteen years old, it is worth about three hundred
and eighty billion dollars; its revenues are more than fifty billion
dollars a year, and around a quarter of that is profit. More than a
billion people perform a Google search every month. It’s natural to
wonder whether there’s something each of us can do to emulate Google,
with directionally similar, if perhaps more modest, results. What makes
the Google model especially alluring is that, as Page and Sergey Brin
put it in the statement that accompanied their initial public offering,
ten years ago, “Google is not a conventional company.” Getting very rich
is always fascinating, but getting very rich while proclaiming that
you’re breaking the rules about how to run a business is even more so.
Every publishing season seems to bring books about how to capture some
of the Google magic. The new crop includes not just “How Google Works”
but also “Think and Grow Digital” (McGraw-Hill), by Joris
Merks-Benjaminsen, a Google executive who holds the title of Benelux
Head of Branding Solutions & Innovation, and, coming soon, “Work
Rules! Insights from Inside Google That Will Transform How You Live and
Lead” (Twelve), by Laszlo Bock, Google’s senior vice-president of people
operations.

“Think
and Grow Digital” is presented as a guide for “millennials” to finding
their way in the beginning and middle stages of a business career, so
it’s filled with references to its intended audience’s youth and
technological savvy—their “brains are different”—and to the bother of
having to work with people who are middle-aged. Merks-Benjaminsen
confesses that he used to see such people as “old, gray, resistant guys,
stuck in their old-fashioned business thinking,” but he has learned to
become more compassionate: “Place yourself in the position of those who
had limited access to the Internet and computers during the first 20 to
50 years of their lives and try to imagine how much new stuff they have
to digest in order to understand what you are saying.” But the book is
filled with maxims, slogans, charts, and other catchy ways of imparting
lessons that even a non-millennial can apply. We learn Google-isms like
“moonshot thinking” and “the funnel of focus.” And we get a closing
proclamation: “Greatness is for everyone.”

Books
like these obviously have some debt to the old and well-established
tradition of American success literature; Merks-Benjaminsen’s title
echoes Napoleon Hill’s 1937 “Think and Grow Rich,” which is still very
much in print. And, for at least a few readers, the burnished tale of
Larry Page’s scrawled protest and the “problem-solving ninjas” who dealt
with it may bring to mind Elbert Hubbard’s 1899 essay “A Message to
Garcia,” which for decades was an inescapable part of the national
culture. Hubbard’s “preachment” took off from a possibly apocryphal
incident during the Spanish-American War: the President must get a
message to General Garcia, the leader of our insurgent friends, who is
somewhere in the mountains of Cuba. When a fellow named Rowan is given
this daunting charge, well, by God, he carries it out. He doesn’t ask
why; he doesn’t ask for Garcia’s exact location; he doesn’t look for
someone else who might do the task instead. Hubbard was celebrating
success, and he was celebrating employees with the goodness and the
gumption “to be loyal to a trust, to act promptly, concentrate their
energies on a thing—‘Carry a message to Garcia.’ ” (Having grown up in
the culturally lagging Deep South, I was raised on this sacred text. The
director of my summer camp read “A Message to Garcia” to us every year,
in front of a mystically flickering bonfire, and we went away properly
awed.)...MORE

The thing I have trouble processing about hedge funds not being able to make money in falling commodity markets is the fact the wee beasties can be traded from either side.

It's almost enough to make one think the managers are nothing but closet trend-followers charging 2-and-20 for what's actually nothing but leveraged beta.
Or something.

From the Wall Street Journal:

Brevan Howard to Close Commodity Fund Due to Poor PerformanceFund, With $630 Million In Assets, Is Down 4.3% This Year

Brevan Howard Asset Management LLP plans to close its commodity hedge
fund following recent poor performance, according to two people
familiar with the matter.

The fund, managed by Stephane Nicolas,
has $630 million in assets. It lost 4.2% last year and is down 4.3% this
year to the end of October, according to performance data reviewed by
The Wall Street Journal.

It is not clear what Mr. Nicolas’s role
might be following the commodity fund’s closure, a person familiar with
the matter said. Attempts to reach Mr. Nicolas were unsuccessful.

Brevan Howard is among Europe’s largest hedge fund managers with about $37 billion in assets.

Brevan’s Macro fund, managed by billionaire
Alan Howard
,
has about $26.5 billion in assets. The macro fund, which has
never reported an annual loss, has faced headwinds this year, struggling
to deliver a positive performance in the ultralow interest rate
environment. The Wall Street Journal reported in August that the firm
sharply cut risk levels in the macro fund during the first half of the
year....MORE

I've made the point a few times over the years, here's a couple from this year:

The thing I don't get about some commodity "specialists" is why they can't make money in down markets.
I mean you can trade from either side but for some reason the
mean-reverting nature of commodity prices seems to challenge some folks
who really should know better....

Just as we expect bankruptcies among the mining companies to mark the
bottom in gold we would expect front page human interest stories on the
travails of the American farmer before the ags turn decisively.
CME corn 378'2 up 4'2 after a $3.71 bottom tick last night, NYMEX gold
$1298.50 up $1.60. WTI popped back over $100, up 81 cents last.

Although the market apparently, and belatedly, began to believe the polls there is more downside ahead.Front futures settled at $1165.80, Kitco spot $1168.50.
From Bloomberg:

Swiss voters rejected a referendum
requiring their central bank to hold a portion of its assets in
gold, a measure its President Thomas Jordan termed an
“invitation to speculators” that could have hamstrung the
economy.

The “Save Our Swiss Gold” proposal stipulating the Swiss
National Bank hold at least 20 percent of its 520-billion-franc
($540 billion) balance sheet in gold and never sell any bullion
was voted down by 77 percent to 23 percent, the government said.
Polls had forecast the initiative’s rejection. Two other
initiatives on tax privileges for foreign millionaires and
immigration limits also were rejected.

SNB policy makers warned repeatedly that the measure, which
also required the 30 percent of central bank gold stored in
Canada and the U.K. to be repatriated, would have made it harder
to keep prices stable and shield the central bank’s cap on the
franc of 1.20 per euro. That minimum exchange rate was set three
years ago, with the SNB pledging to buy foreign currency in
unlimited amounts to defend it.

“The key word is relief, but it’s not a reason to crack
the champagne corks yet,” said Janwillem Acket, chief economist
at Julius Baer Group Ltd. in Zurich. Due to the rejection, “the
SNB has more options and fewer constraints on monetary policy,”
he said....MORE

The writer is too kind to the bucketeers, they were thieves, pure and simple.
The buckets were straight up gambling houses with the action comprised
of side bets on the actual stock movements, not unlike collateralized
default swaps when purchased by someone who doesn't own the underlying
debt.
See our Nov. 2011 post "Are Derivatives Contracts Nothing More than Unenforceable Gambling Debts?"

From the I-triple E ( Institute of Electrical and Electronics Engineers) History Center at Rutgers:

One day in August 1887 President Abner Wright of the Chicago Board of
Trade forcibly removed the instruments of the Postal Telegraph Company
and the Baltimore and Ohio Telegraph Company from the floor of the
exchange, literally throwing their equipment out of the building.

A few months later, on the night of December 15, Wright discovered some
mysterious electrical cables leading out of the basement of the exchange
building. Thinking that they were telegraph lines, he cut them with an
axe. Wright was neither deranged nor a Luddite. Instead, his forceful
actions were dramatic examples of the troublesome technological,
cultural, and economic relationship between the telegraph industry,
finance capitalism, and organized gambling in the United States during
the Gilded Age and Progressive Era.

Wright’s actions occurred in the context of a 25-year struggle between
the Chicago Board of Trade and hundreds of bucket shops. Bucket shops,
depending on whom one believed, were either gambling dens or small
brokerage houses. Brokers and directors of the large exchanges claimed
that bucket shops were nothing more than betting parlors in which
patrons wagered on the price movements of stocks and commodities.
Defenders of the bucket shops denied that they were gambling dens and
asserted instead that they were independent brokers attempting to
compete with the plutocrats and monopolists who controlled the New York
and Chicago exchanges. In either case, bucket shops flourished between
about 1880 and 1910. They purchased ticker service from the telegraph
companies and depended upon the market quotations from the major
exchanges to conduct their trades.

They charged lower commissions, required minimal margins, and traded in
smaller lot sizes than brokers on the major exchanges. In this sense
they democratized speculation: anyone with a few dollars could become
part of the action on the Chicago and New York exchanges. However,
customers’ trades were fictitious; bucket shops could not deliver actual
stock certificates or grain to their patrons. Bucket shops were able to
take root and to flourish in the late 19th and early 20th centuries for
two major reasons, one technological and the other cultural. During the
1870s, two important innovations revolutionized the American telegraph
industry. In the late 1860s Edward Calahan invented the ticker, a
low-cost and low-maintenance printing telegraph which allowed brokers to
monitor transactions on exchange floors.

Several inventors working for Western Union, including Thomas Edison,
brought the ticker to a state of technical perfection by the mid-1870s.
During the same period, Edison invented the quadruplex, a system which
allowed four messages to travel simultaneously over one telegraph wire.
The quadruplex gave Western Union a great deal of flexibility in
handling its traffic.

On major trunk routes, it effectively quadrupled its circuit capacity
without requiring the costly installation of more lines. More
significantly from the standpoint of financial markets, the quadruplex
allowed Western Union to lease excess circuit capacity to financiers and
bucket shops. Taken together, the ticker and the quadruplex allowed
Western Union to exploit the growing demand for realtime financial
information. After about 1880 Western Union aggressively marketed its
ticker service and private wire leases.

Within a few years, both brokers and bucket shops were leasing thousands
of tickers and circuit miles to obtain real-time market quotations.
Ticker service and wire leases soon became Western Union’s most
lucrative activities. The company was reluctant to abandon this highly
profitable market, and it did so halfheartedly around 1910 only under
pressure from the major exchanges, courts of law, and antigambling
reformers.

At the same time that Western Union earnestly began to exploit the
demand for its ticker service, there existed widespread confusion about
the difference between legitimate and economically useful speculation
and illegitimate and harmful gambling. Farmers who blamed the Chicago
Board of Trade for their economic woes, judges who protected the right
of bucket shops to receive ticker service, economists who sought to
explain how financial markets worked, and even brokers themselves all
equated speculation with gambling. Many Americans saw little difference
between the transactions on exchange floors and in bucket shops.

Bucket shops came to the notice of exchange officials in the late 1870s.
The leadership of the Chicago Board of Trade first recognized their
growing threat in the summer of 1880, and they asked telegraph companies
transmitting the Board’s market quotations to cease supplying ticker
service to them. By 1890, anti-gambling reformers estimated that 5000
bucket shops existed throughout the country, including some 200 in New
York, over 100 in Chicago, and at least one in each town with a
population of 10,000. One reformer claimed in 1887 that bucket shops had
so penetrated rural areas that they accounted for 90% of commodity
trading in the countryside, and that they had depressed the price of
agricultural commodities by a total of some $2.5 billion since 1880.

Stock brokers as well as commodity traders felt serious competition from
bucket shops. One prominent broker on the New York Stock Exchange
complained in 1889 that the “indiscriminate distribution of stock
quotations to every liquor-saloon and other places has done much to
interfere with business. Any person could step in a saloon and see the
quotations.”

Indeed, by 1889 competition from bucket shops had depressed the value of
a seat on the New York Stock Exchange by nearly half, from $34,000 to
$18,000, and a seat on the Chicago Board of Trade by over two-thirds,
from $2500 to $800. When they first opened for business in the late
1870s and early 1880s, bucket shops were small, independent store-front
operations, typically located in the vice districts of large towns and
cities.

Like the rest of the American economy in this period, bucket shops soon
exhibited a trend toward consolidation and monopoly. As early as 1890
the New York Times reported that a syndicate popularly known as the “Big
Four” controlled all the bucket shops in Manhattan, had offices in
“every city of consequence in the Union,” and possessed capital
amounting to “millions of dollars.”...MUCH MORE (8 page PDF)

Although the bucket shops rigged the game in their own favor to the
point that if a "customer" kept coming back the mark would lose 100% of
the amount wagered, there were some who understood the game, very few
but enough that the operators kept an eye on the trades.*

Here's one of Haight & Freese' NYC shops. H&F were the largest
of the stock operators with some 70 shops around the country.

*For example Jesse Livermore as describe by Edwin Lefèvre in his roman à clef Reminiscences of a Stock Operator.:

"I began in the smaller bucket shops, where the man who traded in
twenty shares at a clip was suspected of being John W. Gates in disguise
or J. P. Morgan traveling incognito."

"I kept my business to myself. It was a one-man business, anyhow.
It was my head, wasn't it?
Prices either were going the way I doped them out, without any help from
friends or partners, or they were going the other way, and nobody could
stop them out of kindness to me.
I couldn't see where I needed to tell my business to anybody else.
I've got friends, of course, but my business has always been the same - a
one-man affair.
That is why I have always played a lone hand."

Livermore's Fortune Reaches $10,000 - But There's Trouble
Livermore's success soon caused him problems. Bucket shop owners
began to recognize him as a consistent winner - and they only wanted to
trade against losers.
He began having to take smaller positions than he wanted to, or even
lose money in his first trades, only to later hit the bucket shop with
"stings" where he took large winning positions.

As he became widely recognized, the shops began refusing to take his trades.
They called him the Kid Plunger.
(Plunger = reckless speculator.)

"I tried the other branches one after another, but they all got
to know me, and my money wasn't any good in any of their offices.
I couldn't even go in to look at the quotations without some of the
clerks making cracks at me.
I tried to get them to let me trade at long intervals by dividing my
visits among them all.
But that didn't work."

Despite the bucket shops refusing to deal with him (if they
recognized him - Livermore took to disguising himself) or only trading
with him under severe handicaps - such as Livermore paying higher prices
for stocks he wanted to buy and getting less for stocks he wanted to
sell than other customers - Livermore continued to trade profitably.
By the age of 20 his fortune had grown to $10,000.

He had now reached a point where bucket shops began cheating on prices to prevent him winning.
It was time, he realized, to move on and begin trading through legitimate stockbrokers....

By the time he was twenty-one his net worth had fallen to $2500.
So much for the "legitimate brokers".

Jon Markman's annotated edition hints strongly that Haight & Freese was one of the firms trying to get Livermore's business.

Saturday, November 29, 2014

For scientists, skeptics, debaters, or
indeed anyone who values useful information over shrill soundbites,
there is little more infuriating then crass manipulation of the facts to
mislead an audience. Purveyors of woo and snake oil are particularly
skilled at this cynical sideshow, but they are by no means alone in the
practice which all too frequently raises its ugly head in politics too.
And when constructive debate breaks down along ideological barriers, you
can be sure the quality of discussion suffers. When discussions arise,
those with a vested interest are adept at
sidetracking the debate with enough petty logical fallacies to fool an
audience into thinking their claims have some merit. “What beastly
intellectual cowardice!” I hear you mutter. And I concur.

But just for a moment, let me play advocatus
diaboli. Perhaps we should look at their techniques and admire the
smoke and mirrors approach to discussion that can leave the most well
informed earnest orator flummoxed and flustered. Let's give these rogues
their due, and identify some of their little tricks, in the hopes we
can catch them out at their own game.

So for your viewing pleasure, I present..

20 nifty tricks to arguelikeacharlatan

Use circular reasoning liberally – Circular reasoning is
purely tautological but because you're repeating your assertions it'll
just reinforce your message it for the less astute in the audience. “The bible is the literal truth because God wrote it and we know that because the bible says it!”

Construct straw man arguments – If you can't rebut an argument,
misappropriate your opponents position and pummel it to great
applause. Essentially, if you can't attack your opponents position with
a decent retort, make a mock-up of their position and trounce that
instead. Odds are your audience mightn't notice, particularly if you
insinuate something shocking. “Obama's health care reforms will bring in death panels for old people so protest at your town halls

Use ad hominem attacks to reinforce your thesis - Remember that smearing your opponent can be a sure way to turn the audience against him, provided you exploit their prejudice. “My
opponent may be an expert on this subject. But he is also homosexual
who associates with known socialists. Is this the kind of person we
want to be taking advice from?!”

Construct false dilemmas – There is usually a spectrum of valid views on a
subject. Many of the less extreme views require careful nuanced
reasoning to explain - screw that; go nuclear. Fool the audience into
thinking that the choice is a binary one. “You are either with us or with the terrorists!”

I'm afraid it's not that simple, Lord Vader...

Argue from purely anecdotal evidence – No matter how much the evidence is against you, simply quote a
coincidental success story and cite this as proof of your position.
This also works if you're trying to argue that something is endemic when
it isn't - merely keep restating your experience, no matter how
untypical it may be. “I had a headache and when I took some homeopathic remedy it cured it! Therefore it proves homeopathy works!”

The letters of transit — “signed by General de Gaulle,
cannot be rescinded, not even questioned” — were hidden under its
unusual hinged lid. It is golden yellow with touches of green and gold, a
surprise to people who know it only from its black-and-white
adolescence. It has a wad of chewing gum in a place where a wad of
chewing gum really should not be.
It is the stuff that dreams are made of.

It is one of the most famous pianos in the world, the piano Ingrid
Bergman was close to when she delivered one of Hollywood’s unforgettable
lines: “Play it, Sam. Play ‘As Time Goes By.’ ” It is the short little
upright from Rick’s Café Américain in the movie “Casablanca.”
And it has become the stuff of very expensive dreams. It was sold at
auction on Monday for $3.4 million, gum and all. The price included a 12
percent commission.

Of all the auction houses in all the towns in all the world, it had
been wheeled into Bonhams on Madison Avenue for a sale of movie
memorabilia.

Bonhams did not identify the buyer of the piano, one of two seen in
“Casablanca.” The other piano, the one in the Paris flashback scene,
sold for $602,500 at Sotheby’s in December 2012. But as some collectors
noted at the auction on Monday, that piano was on the screen for only 70
seconds.

We do not use the term Islamic State as ISIS is not the Islamic State.

From News.com:The world’s deadliest terror group issues a pancake recipe

THE IS agency for women, has
launched a ‘cookbook’, explaining how to keep jihadists happy and
fulfilled by making pancakes after a day of fighting.
The agency known as Al-Zawra that “prepares sisters for the
battlefield for jihadists” has been dubbed a “finishing school” for
young women hoping to wed militants.

In a step-by-step guide, published
by Al-Zawra, the recipe calls for one egg, four tablespoons of sugar,
one tablespoon of oil, 4 tablespoons of salt, one cup of milk and one
cup of flour.

This follows the first recipe released earlier in November, “balls of date mush”.

In an effort to recruit and train female jihadis, the institution offers classes in everything from sewing to weapons training.

In their mission statement they explain the school is for women
“interested in explosive belt and suicide bombing more than a white
dress or a castle or clothing or furniture.”...MORE

Our target is $70 but like anything involving humans, that could change.
We just experienced a noticeable weakening of the dollar feeding into:
Dec. WTI $75.15 up 94 cents; Brent $79.50 up $2.01.

From Dragonfly Capital:

The sun seems to be setting on Crude Oil ($USO, $CL_F).
It has had a quick run lower for a price of about $108 down to $74 per
barrel in less than 5 months. The bad news for those looking for a
turn around is that the technical picture still looks bleak. The
momentum indicators are pointing lower and the RSI (top scale) has only
just moved in the bearish zone. With that backdrop there are 4
important spots to watch if there is more downside....

The action in the oil markets is the most important story in global macro.
Period.
Right now it is the engine driving the whole narrative from currencies to GDP to junk bonds and figuring out the effects will be very profitable.
Here's John Authers writing for the FT:Opec’s position on output could have profound consequences

Oil
anchors world financial markets, and Opec has just decided to raise its
anchor. The consequences could be profound, and go far beyond the power
game between the traditional oil producers in the Middle East and the
new generation of shale producers in North America.

Oil, it is true, is less important than it was. Steady
improvement in technology has rendered the developed economies less
“oil-intense”, and less vulnerable to a repeat of the 1970s, when oil
price spikes twice led to savage recessions.

But
ever since the postwar version of the gold standard ended in 1971, with
President Richard Nixon’s decision to end the dollar’s fixed price in
gold, oil has been its closest replacement as a store of value in the
world economy. In the 1970s, the savage oil price spikes in terms of
dollars, engineered by a far more active Opec, merely restored oil’s
value in terms of gold. US economic pump-priming had weakened the
dollar.

Oil anchors capital markets most clearly through its tight
inverse relationship with the dollar. When oil rises, so the dollar
tends to depreciate against other currencies. Typically oil exporters
receive payment in dollars and then sell them, meaning that higher oil
prices lead to a lower dollar.

The dollar depreciated significantly in the years leading up
to the 2008 financial crisis, and its nadir overlapped closely with a
speculative bubble in oil. Now, it is strengthening significantly.

That correlation with the dollar leads to a second clear
correlation, with emerging market equities. They tend to outperform when
the dollar is weakening (as in the years leading up to 2008), and to
underperform when the dollar grows stronger.

The last period to see falling oil prices (albeit at a much
lower level), and a strengthening dollar was the late 1990s. That saw a
US equity bull market melt up into a full-blown bubble, while emerging
markets suffered a succession of crises. A stronger dollar made it
harder to pay off their dollar-denominated debt....MORE

And that gets us back to October 30.
Ther are another 20 or so in October.
This is a big deal.

Oct. 27 Oil Shows Some Resilience (today)At the moment oil is probably the most important story in the global economy.
The stimulative effects of lower oil prices are immense, maybe two
trillion dollars, and more important than anything the central bankers
are up to, for now anyway.....

And we still think the broader market is going higher.
The XLE has just rebounded a bit, $84.14 down $1.90 (2.21%).
The triple levered inverse ERY up $1.24 (6.82%) at $19.42 with a target of $21.00.WTI $76.45 down 2.96% on the day....MORE

WTI settled at $66.15 yesterday, Nov. 28 and the ERY closed at $21.92 up $3.57 or 19.46%. Now what?We'll get to that over the course of the weekend but first a look at where we're at right now:

Prices were down along the entire curve (CME) but the contango steepened dramatically.Our $70 target was beaten handily and I'd expect some countertrend action on Monday. The ERY is a triple levered inverse of the XLE, be careful. On Friday the triple-levered gold miner ETF NUGT was down 25.05% (4.01) at $12.00. These things are dangerous.Brent $70.15.

From the FinancialTimes:Market rout as oil slide rocks energy groups

Shares
in the world’s biggest energy groups have tumbled in a market rout as
plunging oil prices put at risk billions of dollars of investment and
jeopardised future supplies of crude.

The sharp slide in the price of Brent oil after Opec’s decision
not to cut output triggered warnings that oil companies would cut as
much as $100bn of capital spending in response, imperilling the US shale bonanza and threatening much Arctic oil exploration.

Meanwhile oil’s fall continued to play havoc with the currencies of oil
exporting countries, especially Russia. At one point on Friday, the
rouble slid to a record low.

Leonid
Fedun, vice-president of Lukoil, Russia’s second largest crude
producer, told the Financial Times that Opec was trying to turn the US
shale oil “boom” into a “bust” for smaller producers.

He compared the surge in North American shale to the dotcom and
subprime mortgage booms, and said Opec’s objective now was “to get small
producers with large debts and low efficiency to pack up and leave the
market”.

Opec said on Thursday that it was leaving its output ceiling of 30m
barrels a day unchanged, prompting a swift 8 per cent drop in the oil
price, which was already down by nearly 40 per cent since mid-June.
Brent fell $2.80 on Friday to $69.78, a four-year low....MORE

“We cannot overstate what a dramatic and fundamental change this is for
the oil market,” said Mike Wittner, senior oil analyst at Société
Générale.

GDX, the biggest exchange-traded fund holding
precious-metal miner stocks, dropped 8.7% on to close at $18.36 on
Friday. Miner stocks, which tend to act like spring-loaded vehicles for
trading gold or silver themselves, have been hugely volatile in recent
weeks as gold has flirted with multiyear lows.

But Friday’s plunge in miners was extreme compared with the move in
gold, and even with the recent turmoil for miner stocks; indeed, Friday
was the biggest one-day percentage decline for GDX since April 15, 2013, a day when gold suffered its biggest ever one-day price drop, according to data from FactSet.

Miners slipped on Friday in tandem with prices for the yellow metal,
which dropped 2.7% to $1,165 an ounce in recent trading. Bloomberg’s Joe Deaux and Laura Clarkenote that falling oil and gasoline prices conspire to tamp down inflation expectations, reducing demand for gold, often singled out as a hedge against rising prices.

Investors are also looking ahead to vote in Switzerland Sunday; a “yes” vote for a measure would require the Swiss National Bank to
ramp up its gold assets. But most expect to measure to fail, which
would hit gold prices more and in turn pressure gold miners even more....MORE

At least one investor was caught on the wrong side of the action, again. Here he is the first time around:

By far my favorite subgenre is that of the Urbane Turkey. This
foppish specimen is usually in evening dress, so as to indicate his
sophisticated couth. Needless to say, he sports a top hat. Sometimes a monocle, or a cigarette. All in all, he has the trappings of a big-screen rich nincompoop, which I suppose added a certain glee to his consumption.

The Urbane Turkey is not always complacent. Sometimes he’s a sharp.
He’s in the know. This Urbane Turkey is the turkey who knows where to
find the best feed and the keenest pea-hens.

As befits his
man-of-the-world air, he smokes a cigar; and
his citified duds are less Union Club than pool hall. This tom doesn’t
take any wooden nickels; he sees the way the wind’s blowing and he’ll be
out on the next train, before the axe is even sharpened. He doesn’t need pardoning; he makes his own luck....MORE

In my view, one of the most enduring and extraordinary features of the
current business cycle expansion has been the strength of corporate
profits. According to the GDP stats released yesterday, third quarter
after-tax corporate profits hit a new nominal high of $1.87 trillion, and
a new high relative to GDP of 10.3%. So it's no wonder that equities
are hitting new highs. Indeed, despite profits hitting all-time record
highs, PE ratios today are only slightly above average. Stocks by this
measure still look quite attractive.

From 1958 through 2004, after-tax corporate profits averaged about 5.3%
of GDP. Since then, and including the profits collapse of the Great
Recession, after-tax corporate profits have averaged 8.8% of GDP. As the
chart above shows, over the entire period since 1958, corporate profits
have averaged about 6% of GDP. For the past 5 years, equity bears have
in effect argued that profits were unsustainably high because they had a
strong tendency to be mean-reverting to, say, 6% of GDP. Instead,
profits have just continued to grow, both nominally and relative to GDP.
A pessimistic outlook for corporate profits has essentially been the
driving force behind the equity market's gains, because profits have far
exceeded expectations. In a sense, the market has been forced higher
because profits have been much stronger than expected....MUCH MORE

The 3-D printer delivered to the International Space Station two
months ago made a sample part for itself this week. It churned out a
faceplate for the print head casing.

Space station commander Butch Wilmore removed the small plastic
creation from the printer Tuesday for eventual return to Earth. About 20
objects will be printed in the next few weeks for analysis back home,
NASA said. The space agency hopes to one day use 3-D printing to make
parts for broken equipment in space.

Made in Space, the Northern California company that supplied the
space station's 3-D printer, called it "a transformative moment." The
newly created, rectangular faceplate — considered functional by the
company — includes the Made in Space name, as well as NASA's.

"When the first human fashioned a tool from a rock, it couldn't have
been conceived that one day we'd be replicating the same fundamental
idea in space," Aaron Kemmer, chief executive officer, said in a
statement....MORE

Deere & Co warned of an accelerating decline in the
global farm equipment market as the agricultural machinery giant cautioned of a
40% tumble in earnings over the next year, a bigger drop than Wall Street had
expected.

The maker of John Deere machinery unveiled results for the
August-to-October period, the fourth quarter of its financial year which, while
down 10.6% at $3.16bn, exceeded market forecasts.

The results were equivalent to $1.83 per share, ahead of the
$1.57 per share that analysts had pencilled in.

Samuel Allen, the Deere & Co chairman and chief executive,
said the company had achieved a "solid performance in spite of weaker
conditions in the global farm sector", for which profits are being undermined
by lower crop prices.

Sales drop

However, the group cautioned of a deepening decline in the
ag machinery market, expecting the group's own sales in the sector to fall by 20%
in the year to October 2015.

Deere reported a drop of 9% in sales in the year to the end
of last month, and 13% in the August-to-October period....MORE

"Deflation" and "boom" are not
two words that normally go together. They are almost like "sad
happiness," "lo-cal donut." But in their very unlikely pairing they
appear to do a good job of explaining the unusual economic and market
environment that may lie ahead.

It’s a term discussed this week
by Cornerstone Macro analyst Francois Trahan to describe a rare
condition in which a country’s economic activity rises but inflation
falls. He believes that is the right interpretation of the Philadelphia
Fed data released on Tuesday that showed output in the region up but
prices paid falling, as shown in the chart below.

The
improvement of the Philly Fed can be seen in part as a result of the
stimulative effect of falling crude oil prices, and their ripple effect
on the broad economy. The chart below, created by Cornerstone, shows the
Philly Fed Index (green line) charted against the six-month percent
change in the price of Brent Oil, advanced four months (gray) and
inverted.

The
oil price is advanced four months to show the lagged effect that oil
has on economic activity. In other words, when oil falls in price it
takes about four months for the change to have an effect on end users’
decisions....MORE

WTI $73.59, last. Our target is $70.00 but if the shale guys don't cut back on their drilling the price is going quite a bit lower. Brent $77.95.
From Project Syndicate:

The price of oil
has fallen more than 25% in the past five months, to less than $80 a
barrel. If the price remains at this level, it will have important
implications – some good, some bad – for many countries around the
world. If it falls further, as seems likely, the geopolitical
consequences on some oil-producing countries could be dramatic.

The
price of oil at any time depends on market participants’ expectations
about future supply and demand. The role of expectations makes the oil
market very different from most others. In the market for fresh
vegetables, for example, prices must balance the supply and demand for
the current harvest. By contrast, oil producers and others in the
industry can keep supply off the market if they think that its price
will rise later, or they can put extra supply on the market if they
think the price will fall.

Oil
companies around the world keep supply off the market by reducing the
amount of oil that they take out of the ground. Oil producers can also
restrict supply by holding oil inventory in tankers at sea or in other
storage facilities. Conversely, producers can put more oil on the market
by increasing production or by running down their inventories.

The
market expectations reflected in today’s price reflect lower future
demand and increased future supply. Lower demand reflects both the
current weakness of economic activity, particularly in Europe and China,
and, more important, the longer-term changes in technology, which will
increase cars’ fuel efficiency and induce the use of solar power and
other non-oil energy sources. The increase in the future potential
supply of oil reflects new output produced by fracking, the development
of Canada’s tar sands, and Mexico’s recent decision to allow foreign oil
companies to develop the country’s energy sources.

These
changes in demand and supply suggest that the future price of oil will
be lower than industry participants expected until just a few months
ago. Some of the recent changes in expected future demand and supply
could have been anticipated earlier. But there is no way to know when
attitudes and expectations will change. The historic volatility of oil
prices reflects these psychological shifts as well as changes in
objective reality.

Today’s
oil price is also linked to anticipated future interest rates. More
specifically, oil producers have an investment choice: They can increase
production now, selling the additional oil at today’s price and
investing the proceeds at the existing long-term interest rate, or they
can leave the oil in the ground as an investment.

A
low rate of interest encourages producers to leave oil in the ground.
When the current abnormally low interest rates on long-term bonds rise
over the next few years, it will become more attractive for producers to
increase the supply of oil and invest the resulting income at the
higher rate. Unless expectations about the fundamentals of future supply
and demand change, the rise in the interest rate will cause oil prices
to fall further.

The
low price of oil is good news for the United States economy, because it
implies higher real incomes for American consumers. Within the US, the
lower price is transferring real income from oil producers to
households, which raises short-term demand because households spend a
higher proportion of their incomes than oil firms do. For the same
reason, the lower price also gives a boost to aggregate demand in
Europe, Asia, and other oil-importing regions....MORE

Earth's magnetic field has weakened by 15 per cent over the last 200 years

Could be a sign that the planet's north and south poles are about to flip

If this happens, solar winds could punch holes into the Earth's ozone layer

This could damage power grids, affect weather and increase cancer rates

Evidence of flip happening in the past has been uncovered in pottery

As the magnetic shield weakens, the spectacle of an aurora would be visible every night all over the Earth

Deep within the Earth, a fierce molten
core is generating a magnetic field capable of defending our planet
against devastating solar winds.

The
protective field extends thousands of miles into space and its
magnetism affects everything from global communication to animal
migration and weather patterns.

But
this magnetic field, so important to life on Earth, has weakened by 15
per cent over the last 200 years. And this, scientists claim, could be a
sign that the Earth’s poles are about to flip.

Scroll down for videos...

The Earth's protective field extends thousands
of miles into space and its magnetism affects everything from global
communication to animal migration and weather patterns

Experts believe we're currently overdue a flip, but they're unsure when this could occur.
If a switch happens, we would be exposed to solar winds capable of punching holes into the ozone layer.

The
impact could be devastating for mankind, knocking out power grids,
radically changing Earth’s climate and driving up rates of cancer.

‘This
is serious business’, Richard Holme, Professor of Earth, Ocean and
Ecological Sciences at Liverpool University told MailOnline. ‘Imagine
for a moment your electrical power supply was knocked out for a few
months – very little works without electricity these days.’

The Earth's climate would change
drastically. In fact, a recent Danish study believes global warming is
directly related to the magnetic field rather than CO2 emissions.

The
study claimed that the planet is experiencing a natural period of low
cloud cover due to fewer cosmic rays entering the atmosphere.

Radiation at ground level would
also increase, with some estimates suggesting overall exposure to cosmic
radiation would double causing more deaths from cancer.

Researchers predict that in the event of a flip, every year a hundred thousand
people would die from the increased levels of space radiation.

The magnetosphere is a large area around the
Earth produced by the planet's magnetic field. It presence means that
charged particles of the solar wind are unable to cross the magnetic
field lines and are deflected around the Earth

'Radiation
could be 3-5 times greater than that from the man-made ozone holes.
Furthermore, the ozone holes would be larger and longer-lived,' said Dr Colin Forsyth from the Mullard Space Science Laboratory at UCL....MORE

Journalists may have many biases, but among the most important is that they always see the glass as half empty. It's a phenomenon researchers call "negativity bias,"
and studies show all humans share it. This is why Thanksgiving is a
useful holiday. It gives us a reason to think about what's actually in
the bottom half of the glass.

The facts, once you look at them,
are indisputable. The world in the 21st century is really a remarkable
place to live, and it's getting better all the time, even for its
poorest inhabitants.
-- Wars claim fewer lives today than ever in human history, by several orders of magnitude. Here's the Associated Press:

Before
there were organized countries, battles killed on average more than 500
out of every 100,000 people. In 19th century France, it was 70. In the
20th century with two world wars and a few genocides, it was 60. Now
battlefield deaths are down to three-tenths of a person per 100,000.

Is it "a Uber" or "an Uber"?
I know Churchill went with "A History of the English-Speaking Peoples" rather than "An History..."
Anyhoo, there's more to the BuzzFeed/Uber contretemps than we got to last week.

There’s been a bit of controversy over the past several days
regarding a piece that BuzzFeed published about an executive for Uber, a
large ride-sharing company. According to BuzzFeed editor-in-chief Ben
Smith, an Uber executive revealed that he wasn’t above digging up dirt
on journalists in order to influence news coverage of the company.

Smith disclosed this admission from Uber in an 800-word exclusive on Monday. The piece is written in the third person in order to deliberately obscure the fact that Smith himself was the BuzzFeed editor who attended the off-the-record event at which the Uber executive’s remarks were made.

Ben Smith also failed to disclose his boss’s investment in Sidecar, one of Uber’s main competitors. Ken Lerer, the executive chairman of BuzzFeed,
is also the managing director of Lerer Hippeau Ventures (previously
known as Lerer Ventures), a New York City-based venture capital firm.
Lerer, through Lerer Ventures, was an early investor in Sidecar, a ride-sharing competitor of Uber. From TechCrunch:

Sidecar is announcing this morning that it’s raised a
Series A round of $10 million led by Lightspeed Venture Partners and
Google Ventures. The funding follows on a seed round raised late last
year from investors that include Spring Ventures, Huron River Ventures,
SV Angel, Lerer Ventures, First Step Fund, Jeff Clarke,
Lisa Gansky, Robert Goldberg, Jared Kopf, Konstantin Othmer, Mark
Pincus, Martin Roscheisen, Josh Silverman, and Thomas Varghese.

Sidecar is also listed as a portfolio company on the web page for Lerer’s VC firm:

The seed stage deal between Sidecar and its group of investors, which
included Lerer Ventures, was first announced in a press release after
the deal official closed on December 1, 2011, according to
Marketline/Datamonitor.

Lerer isn’t just a top BuzzFeed executive, though. He’s also an investor in the company:

In his broadside against Uber’s dirt-digging executive, Ben Smith
never disclosed that his boss, one of BuzzFeed’s top executives, has an
ownership stake in one of Uber’s competitors. Nor is there any such
conflict-of-interest disclosure in any of BuzzFeed’s numerousotherhit piecesonUber (including this one, which was posted mere hours ago)....MORE

HT: Scott Adams (yes, Dilbert's boss. the comments are also worth a look)

Mankind has landed a spacecraft on a comet 300 million miles away. Yet, after decades of academic research, the
challenge of distinguishing skill from luck among actively managed mutual funds has remained largely
unsolved.

Much is at stake in this challenge. If skill can be identified, then it is likely to persist, affording clients
superior performance. But a manager who is merely lucky will eventually succumb to underperformance.

If rocket science has a counterpart in financial analysis, it is in the quantitative analytics from companies
like
Boston-based Northfield Information Services. Last week, I spoke with Dan
di
Bartolomeo, founder and CEO, to see if he could detect skill or luck among the two biggest fixed-income
managers:
Bill Gross, when he managed the PIMCO Total Return Fund (PTTRX), and Jeffrey Gundlach, manager of the DoubleLine
Total Return Fund (DBLTX).

Northfield has been providing risk analysis and tools for portfolio construction to institutional asset managers
for
30 years. Among its noteworthy accomplishments, Northfield’s analysis was used by Harry Markopolos to
confirm
that Bernie Madoff was engaged in a massive Ponzi scheme.

Scores of academicians and commercial vendors have attempted to identify skillful managers. The problem, di
Bartolomeo said, is that most people “do this badly” and don’t deal with all the issues in
sufficient detail.

Northfield’s methodology was originally published in this 2006 paper. Di Bartolomeo said the published results documented
predictive power that was three times stronger than what was previously reported in the academic literature. It
was
both economically and statistically significant.

I’ll discuss the results of the Gross versus Gundlach analysis, but first let’s review Northfield’s
system for distinguishing skill from luck.

A four-step process
Northfield’s methodology is based on the assumption that skill –once identified—will persist.
If a manager’s performance is due to skill, that skill – or lack thereof – will continue. If a
manager’s performance is due to luck, however, the best guess for future performance is the average of an
appropriately constructed peer group. In other words, if a manager’s outperformance is due to luck, it
will eventually revert to the mean.

According to di Bartolomeo, the academic literature has found that performance is persistent over a relatively
short time horizon, “one to three years, depending on who you believe.” Northfield tested its
results over a one-year time horizon.

Each fund is analyzed using a four-step process. Northfield first determines the appropriate peer group for each
fund. An iterative methodology with returns-based analysis is used, a tool first developed by William Sharpe. Di
Bartolomeo described this as a “very numerically intensive” processes, which uses a large group of
funds to find ones that act similarly. For every fund, Northfield determines a distinct and custom peer
group.

“Unless you correctly classify funds, there is no persistence in fund performance,” di Bartolomeo
said. “If you don’t, you might as well be throwing darts.”

The second step is to identify how much history should be used in that fund’s analysis. Northfield does
this with a tool known as CUSUM. Developed in the 1950s, CUSUM is a sequential probability test that was first
used to measure quality control on assembly lines. It looks for trends in the number of rejects. Bad performance
for a mutual fund is like a reject on an assembly line....MORE

The country, which has lured oligarchs from across the
globe with its mix of urban realness and refreshing weather conditions,
will hugely increase the top rate of tax knowing they are too enraptured
with Scotland to consider moving elsewhere.

Oil magnate Roy Hobbs said: “Scotland is both an Eden and a trap.

“Barbados is worthless after an afternoon on the beach at
Broughty Ferry and once you’ve seen Glasgow, how could New York ever
satisfy?...MORE

Tuesday, November 25, 2014

The rouble may be down more than 25 per cent versus the dollar this
year, but the currency’s recent slide won’t be enough to dissuade
legendary investor and author Jim Rogers from adding to his Russia
investments.

Rogers told the Financial Times on Tuesday his bullish case was based
on the view there had been a fundamental change in the Kremlin’s
mindset when it came to the treatment of foreign investors. This, he
said, had led him to about-turn on his previous scepticism about the
country’s potential and views he had set from the moment he had first
visited the country over 46 years ago.

“They understand that they can’t treat investors the same way Stalin did anymore, and that you have to treat them properly.”

Rogers caveated the point with the assertion that investors had at
least been treated better until the international community implemented
sanctions on Russia in response to its activities in Ukraine earlier
this year. But he added he had no doubt the current crisis would pass
like most other crises he had experienced over his lifetime. He said his
views were ultimately based on looking to the long term because he was a
terrible market timer, and his aim was to invest in an economy while it
was still in a depressed state.

Rogers’ Russian investments now include stakes in fertiliser maker
Phosagro, airliner Aeroflot, a Russia ETF and the Russian stock
exchange, but he said was looking to expand into different sectors as
well.

With respect to his position in Phosagro, Rogers’ cited GMO’s Jeremy
Grantham longstanding position that because phosphorus cannot be made or
substituted there isn’t enough of the vital fertiliser element to serve the needs of a growing global farming industry....MUCH MORE

The security robots, called Knightscope K5 Autonomous Data
Machines, were designed by a robotics company, Knightscope,
located in Mountain View, California.

The robots are programmed to notice unusual behavior and alert
controllers. It also has odor and heat detectors, and can monitor
pollution in carpets as well. Last but not least: with cameras,
the Robocops can remember up to 300 number plates a minute,
monitoring traffic.

It works like this: someone steps in front of a robot, which
stops and moves around the person while sending video to a
control center. If a burglar doesn’t leave, then “the robot
is looking at the video, listening for glass breakage, any loud
sound that breaking in would cause. We'll get the license plate,
picture of the vehicle, geotag location, and time,” says
project co-founder Stacy Stephens....MUCH MORE